DANAJAMIN NASIONAL BERHAD - 2017

MARC has assigned ratings of AAA_IS and AA+_IS to Danajamin Nasional Berhad’s (Danajamin) Senior and Subordinated Sukuk Murabahah respectively of up to RM2.0 billion under a proposed sukuk programme. Concurrently, MARC has affirmed its insurer financial strength rating of AAA and counterparty credit ratings of AAA/MARC-1 on Danajamin. The ratings carry a stable outlook.

The ratings are driven by Danajamin’s status as a government-owned financial guarantee insurer (FGI) with the key role of facilitating market accessibility to ringgit-denominated bond and sukuk issuers. Danajamin’s stringent risk controls, conservative investment policy and strong liquidity position support the ratings. The one-notch rating differential between the Senior and Subordinated Sukuk Murabahah reflects the subordination of the latter to the senior obligations of Danajamin.

Danajamin is currently setting up the sukuk programme to diversify its funding sources and capital base. The sukuk programme will provide Danajamin with an alternative funding platform should the need arise. Additionally, any issuance of Subordinated Sukuk will qualify as Tier 2 capital instrument under Bank Negara Malaysia’s risk-based capital (RBC) framework for insurers. MARC notes that the proposed sukuk programme is in line with Danajamin’s internal capital adequacy assessment process (ICAAP) under its regulatory framework. As at end-March 2017, Danajamin’s total equity stood at RM1.6 billion excluding a callable capital of RM1.0 billion from the government. The FGI’s capital adequacy ratio remains healthy, standing above 300%, higher than the minimum requirement of 130%. Net leverage ratio, as measured by total net outstanding guarantee amount to total equity, stood at 2.85 times (end-2016: 3.02 times). MARC does not expect the ratio to rise significantly over the near term as portfolio growth is expected to be moderate.

Danajamin’s gross outstanding guarantee amount declined slightly to RM5.3 billion as at end-June 2017 (end-2016: RM5.7 billion). As at date, the FGI has approved several new issuances to add to its portfolio of 22 issuances; however, the addition of new issuances could be partly offset by early redemptions. In terms of sectoral exposures, property, and oil and gas accounted for 22.0% and 17.1% of gross outstanding guarantee amount respectively as at end-June 2017. Danajamin mitigates this concentration risk through risk-sharing collaboration arrangements with financial institutions. The fronting amount for banks has increased from RM281.0 million in 2013 to RM852.0 million in 1H2017, of which RM547.0 million is related to the issuers in the property, and oil and gas sectors. This risk-sharing arrangement has resulted in a net combined guarantee amount of RM1.5 billion for these two sectors.

For 2016, Danajamin’s net earned premiums grew by 4.0% y-o-y to RM89.9 million due to higher net earned premiums from two new deals during the year. Coupled with a higher investment income due to improved investment yield, net profit rose by 5.2% y-o-y to RM125.5 million. The increased investment yield during the year was partly due to a higher fixed deposit rate which had been locked in by Danajamin prior to the interest rate cut in July 2016. For 1Q2017, net profit declined slightly to RM30.4 million although full year earnings should improve slightly from the previous year provided the pending new deals are completed within the financial period.

While MARC opines that the planned sukuk issuance in 3Q2017 could lead to negative carry arising from higher funding cost relative to investment income, any such loss is likely to be insignificant relative to its net profit. MARC understands that proceeds from the sukuk issuance will be largely invested in short-term money market deposits and low-risk assets. As at end-March 2017, these assets accounted for 84.9% of Danajamin’s total investments of RM1.6 billion and the investment mix is expected to be maintained at the current level going forward. MARC views that this investment strategy will continue to underpin Danajamin’s strong liquidity position.

The stable outlook reflects MARC’s expectation that government support to the financial guarantee insurer remains and that Danajamin’s financial metrics will continue to be strong.

Major Rating Factors

Strengths

• Government-sponsored sole financial guarantee insurer;
• Sound governance structure; and
• Strong liquidity position and conservative investment policy.

Challenges/Risks

• Reducing sector concentration risk